Mortgage Default Guide

Is it time to renegotiate a mortgage?

Low mortgage rates in Canada is prompting the question on whether or not you should renegotiate your mortgage. Whether it's to get access to your home's equity, consolidate debt or take advantage of low rates, here's what you need to know about renegotiating a mortgage (and possibly avoid mortgage default)
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There are a variety of reasons why homeowners may opt to take out a second mortgage, open a Home Equity Line of Credit or choose to refinance or renegotiate their mortgage. However, these days the single, biggest reason to find more favourable mortgage terms and renegotiate a mortgage is to avoid a mortgage default, a potential situation prompted by the COVID-19 outbreak. 

Already a troubling time, the process of renegotiating your mortgage shouldn’t add to your stress. But even if you don’t face impending financial hardship and you simply want to renegotiate a new mortgage contract to take advantage of today’s low mortgage rates, here’s are four tips to consider.

#1: Give your lender a good reason

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Lenders are in the business of making money off of people borrowing and repaying their debts. As a result, mortgage lenders are rarely willing to break your current mortgage contract to offer you new, better terms unless there’s a really good reason. Turns out the best reason is financial hardship. 

One method is to show your monthly bills and match it with your monthly income. If you can show that a recent loss of job has resulted in your inability to make good on your current mortgage payment, your lender will attempt to find other debt terms that will enable you to pay the debt, without going into default. 

For this to work, you’ll usually have to prove you’re having trouble by sharing documents that tell the story of your financial situation. This can include your budget, banking statements, credit card statements, unemployment information, tax returns, etc.

#2: Know your credit score

Before approaching a lender to renegotiate your mortgage, first check you credit score. Having good credit shows your history of paying back debts — and mortgage lenders really, really like this trait in a borrower. 

Keep in mind any new mortgage contract  — whether it’s a new mortgage application, a renewal with a new lender, a refinance mortgage, or a renegotiated mortgage — you will be required to qualify for the loan amount based on the 2018 mortgage stress test. This test uses stricter criteria to confirm that borrowers are able to pay their mortgage, even if mortgage rates go up. The criteria requires the lender to qualify you based on the five-year benchmark posted rate, which is typically about 200 basis points (2%) above discounted rates.

#3: Use competition to your advantage

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Not everyone who wants to renegotiate a mortgage is in financial difficulty. If that’s you, then consider using the competitive marketplace to your advantage. 

Just as you did the first time you went shopping for a mortgage, talk to a mortgage broker or a few lenders. Get their best rates and offers, in writing. Then use these quotes to renegotiate a better offer with your current lender. The reason to do all this work is simple: You don’t pay as many fees if you stay with the same lender and, by comparison shopping, you have a much better chance of negotiating better mortgage terms. 

#4: Consider refinancing, instead

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When you renegotiate a mortgage, you are essentially keeping the debt the same but attempting to change other aspects of the contract, such as mortgage rate, length of term or amortization and prepayment privileges. 

A renegotiated mortgage works best when you are okay with your existing mortgage amount, but want to make changes or switch to a different lender.

A refinance, on the other hand, requires a new mortgage application whether it’s with a new lender or with your current lender. That’s because a refinance typically means you are changing the amount borrowed, using your home as collateral. Typically, a refinance means the homeowner is looking to increase the amount borrowed. 

Just keep in mind that a refinance means you are essentially applying for a new mortgage, so your finances need to be in good standing. 

If you still decide to go this route, be aware that you will be required to pay out-of-pocket costs, such as legal and appraisal fees, as well as any penalties for breaking your current mortgage. (Some lenders will offer financial incentives if you transfer or open a new mortgage with them, even if it’s a refinance.)

Struggling to pay bills and to avoid mortgage default can be stressful. Use these three general strategies to determine whether or not you should renegotiate your mortgage and the best way to get terms that help you keep your home.

Romana King
Romana King

Romana King is an award-winning personal finance writer and the current director of content for Zolo. King has contributed to business and lifestyle publications including CBC.ca, Toronto Sun, Maclean’s, MoneySense, Globe & Mail Custom Content Team, and Toronto Star. She is a passionate speaker about financial education and engages her audience on a variety of personal finance topics from kids and money, home buying and selling tips, and estate and investment planning. King won the 2015 SABEW Business Journalism award and is currently nominated for a COPA 2019 award, Best Service Article, for her annual project Best Deals in Real Estate. As editor of CI Top Broker, King guided her magazine to obtain its first KRW Business Journalism nomination, and she was part of the small team in 2011 that helped MoneySense win Magazine of the Year at the 34th annual National Magazine Awards.

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